Why Are Currency and Checkable Deposits Money in the Economy

Currency and checkable deposits are considered money in the economy because they are widely accepted as a medium of exchange. This means people can use them to buy goods and services from others.

They have a high degree of liquidity, making it easy to convert them into other forms of money. For example, if you have a currency note, you can use it to buy a product from a store.

In other words, currency and checkable deposits are money because they are easily accepted and can be quickly converted into goods and services.

Measuring Money Supply is crucial in understanding how much money is circulating in an economy. The Federal Reserve publishes reports on three money aggregates: M1, M2, and M3, but since 2006, they no longer publish M3 data.

M1 is defined as the sum of all currency in circulation, plus the value of most liquid deposits at commercial banks, except those held by the government, foreign banks, or other depository institutions. This means M1 includes currency and checking accounts, which are the most commonly used exchange mediums.

The money supply within the United States is graphically depicted by the Federal Reserve, showing the money supply in billions of dollars on the y-axis and the date on the x-axis. This information is periodically updated on the Federal Reserve of St. Louis' site.

M1 includes demand deposits and checking accounts, which are the most commonly used exchange mediums through the use of debit cards and ATMs. Of all the components of the money supply, M1 is defined the most narrowly.

Here's a breakdown of what's included in M1 and M2:

This table illustrates the difference between M1 and M2, with M1 including only currency and checking accounts, and M2 including savings accounts and money market accounts as well.

Money is measured in different ways, but at its core, it's defined by its ability to be spent. M1, the narrowest measure of the money supply, includes currency and checkable deposits. Currency refers to coins and paper money in the hands of the public.

M1 includes all spendable deposits in commercial banks and thrifts, which can be turned into cash with little effort or cost. Near monies, like savings accounts and money-market mutual funds, are also part of a broader measure of money, called M2.

Here are the key concepts and terms to understand why currency and checkable deposits are money:

Money serves as a medium of exchange, allowing individuals to trade goods and services without needing to barter directly.

The value of money is derived from its acceptability, which is influenced by its scarcity, durability, and divisibility.

Money acts as a unit of account, enabling individuals to express the value of goods and services in a standardized way.

Its fungibility makes money interchangeable, allowing one unit to be substituted for another without affecting its value.

Money's store of value function allows it to hold its purchasing power over time, making it a reliable means of saving.

Money can be measured in different ways, and one of those ways is M1, which includes currency and money in checking accounts. This is the most liquid form of money, meaning it's easily accessible and can be spent quickly.

Traveler's checks are also a part of M1, but they're not as popular as they used to be. In fact, their use is declining.

M2 is another way to measure money, and it includes all of M1, plus savings deposits, time deposits, and money market funds. This gives us a broader picture of the money supply.

Fiat money is a type of money that gets its value from the fact that people believe it has value. It doesn't have any inherent value, but people trust it.

Bartering is an exchange of goods or services without using money. This can be useful in certain situations, but it's not as common as using money.

Here are some key terms to keep in mind:

Governments intentionally change the money supply to have residual impacts on the broader economy. For example, in response to the COVID-19 pandemic, governments increased the M1 money supply, making it easier to come about capital to help stimulate the economy, keep workers employed, and encourage business activity.

Central banks can increase the M1 money supply by increasing the amount of physical currency in circulation, lending money to banks, or purchasing securities on the open market. On the other hand, as seen in the aftermath of COVID-19, central banks reverse these policies to cool the economy to fight inflation.

M1 money supply changes can also occur through business and consumer spending. As consumers and businesses spend more money, they create greater demand for that local currency. Therefore, as consumers write checks, use debit cards, or use credit cards, the M1 money supply increases.

Governments intentionally change the M1 money supply to have residual impacts on the broader economy. For example, in response to the COVID-19 pandemic, governments increased the M1 money supply to stimulate the economy.

Central banks can increase the M1 money supply by increasing the amount of physical currency in circulation, lending money to banks, or purchasing securities on the open market.

As seen in the aftermath of COVID-19, central banks reverse these policies to cool the economy and fight inflation. This shows how governments can control the money supply to achieve specific economic goals.

Businesses and consumer spending also have an impact on the M1 money supply. As consumers and businesses spend more money, they create greater demand for that local currency.

The M1 money supply increases as consumers write checks, use debit cards, or use credit cards. This is a common way for people to spend money and contribute to the overall money supply.

In May 2020, the definition of M1 changed to include savings accounts given the increased liquidity of such accounts. This change reflects the evolving nature of how people hold and use their money.

The Federal Reserve Bank tracks M1 and M2 because it helps them understand the money supply and how it's changing. This information is crucial for making informed decisions about the economy.

The total amount of U.S. currency in circulation is about $3,500 per person, which is more than most of us carry. This is a staggering amount of cash that's somehow not being used.

If you take $100 out of your piggy bank and deposit it in your checking account, M1 actually decreases by $100, but M2 remains the same because checking account deposits are still considered M2.

The Federal Reserve Bank tracks M1 and M2 to understand the money supply in the economy. They use this data to make informed decisions about monetary policy.

The total amount of U.S. currency in circulation divided by the U.S. population is about $3,500 per person, which is more than most people carry.

This suggests that a lot of cash is being held by businesses, institutions, or individuals for various reasons. Perhaps it's stored in safes or vaults, or maybe it's being used for transactions that don't involve digital payments.

If you take $100 out of your piggy bank and deposit it in your checking account, M1 actually increases because you've added to the amount of checkable deposits. However, M2 remains unchanged because the $100 is now included in M2.